A Canadian fiRm Is Considering Purchasing a Subsidiary in Great

question 312

Multiple Choice

A Canadian firm is considering purchasing a subsidiary in Great Britain. The subsidiary will cost £16 million and will generate cash inflows of £7.6 million per year at the end of each of the next three
Years. After that, the company will be worthless. The current exchange rate is £0.83 British pounds
Per $1. The Canadian inflation rate is expected to be 4% over this period. The current risk-free rate
Of interest in Canada is 5% and the risk-free rate in Great Britain is 8%.[LINE][LINE]Assume the cost
Of capital for this project is 15% on dollar investments. What is the NPV of this project using the
Foreign currency approach?

• A) $294,405
• B) $489,269
• C) $524,963
• D) $631,896
• E) $832,095

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